A condensed version of a speech Professor Cornell delivered at the Montana Indian Business Conference in Great Falls, Mont., on February 2, 2006.

Stephen Cornell is a professor of sociology and of public administration and policy at the University of Arizona, where he also directs the Udall Center for Studies in Public Policy and serves as a faculty associate of the Native Nations Institute for Leadership, Management, and Policy. Professor Cornell cofounded and codirects the Harvard Project on American Indian Economic Development.

The following feature, a special toCommunity Dividend, is the condensed version of a speech Professor Cornell delivered at the Montana Indian Business Conference in Great Falls, Mont., on February 2, 2006. The conference, which was cosponsored by the Minneapolis Fed, focused on developing tribal legal and governmental infrastructure as a means of supporting robust business growth.

A recent edition of The Wall Street Journalincluded an op-ed piece about Indian reservations. The gist of the article was that Indian reservations have become nothing more than pockets of poverty and need to be shut down. The time of tribal nations, it argued, is over.

This is an old story, of course. We've heard it all before. But as I read the piece, I thought, isn't it a pity that The Wall Street Journal, the leading chronicler of American business and economic growth, is missing the really important stories from Indian Country today?

What are those stories? I want to talk about two of them, about two transformations in American Indian economies. One is really big. The other is not quite so big, but it's important, and that's the one I'm going to focus on here. But let's talk first about the big one, the big story that the media have missed.

The big story: A major transformation

I believe we are seeing a major transformation in the economies of American Indian nations. This transformation is not a result of gaming, although gaming is an important aspect of it. It’s much more important and far-reaching than gaming, although it doesn’t get anywhere near the attention gaming gets. It’s the gradual shift, building up over the last 25 or so years, from transfer-based economies to productive ones. It’s big, it’s happening now, and it’s transforming Indian nations.

What do I mean by this? To a large extent, and with relatively few exceptions, for more than a century Indian nations have been heavily dependent on transfer payments from the federal government. These have come in the form of individual welfare payments and in federal subsidies for tribal governments, social service programs, and even for jobs, which have been overwhelmingly in tribal governments. In other words, reservation economies have been largely transfer economies, as opposed to productive ones. They have involved little productive economic activity, in the form either of tribally owned enterprises or of citizen-owned businesses, or what I call “citizen entrepreneurship.”

The big story is that over the last couple of decades, this has been changing. The change is gradual, and it is not universal, but productive economic activity is booming on Indian lands. Relative to the whole of Indian economies, the transfer sector is shrinking, and the productive sector is growing, from the Nebraska Winnebago’s Ho-Chunk, Inc.; to the Cheyenne River Sioux Tribe’s bison enterprise; from the Citizen Potawatomi Nation’s integrated food enterprises, growing their own beef and vegetables and selling them in their own supermarkets; to the Oneida Farms in Wisconsin, which is changing Oneida diets and health. You see it in the Yukaana Development Corporation, doing environmental clean-up work in Alaska in the San Carlos Apache telecommunications enterprise; and in the Blackfeet Nation’s Siyeh Corporation, right here in Montana that won an Honoring Nations award from Harvard University this past November.

This is a critical transformation. It’s bringing fresh jobs and revenue to Indian Country, improving the quality of life on Indian reservations, reducing tribal dependence on federal dollars and advancing tribal sovereignty and self-determination. And while it includes numerous gaming enterprises and related resorts, it’s not about gaming. It’s about Indian nations finding new ways to give their peoples opportunities to live productive, satisfying lives. It’s happening, for the most part, on tribal terms, as an outgrowth of tribal communities and initiatives. It’s the biggest economic transformation Indian Country has seen since federal policies led to the collapse of indigenous economies in the nineteenth century. And it’s getting far too little attention.

The not-so-big story: A second transformation

So that’s the big story. But within this transformation, within this sea change in the economies of American Indian nations, there’s a second transformation taking place as well. It’s much more modest, but it’s important, and it’s the one I want to focus on today. Within this emerging, productive sector of Indian economies, the emphasis has long been on tribally owned enterprises. All the businesses I just mentioned—and many others—are nation-owned and -operated, and they have brought new life to Indian Country.

But now we’re seeing something else happening as well: the emergence of an independent business sector, or what might be called a private sector, on a growing number of reservations.

In 1997, the U.S. Census Bureau estimated that there were more than 197,000 Native-owned firms in the United States including tribally owned enterprises. In 2002, they estimated that number had grown to more than 206,000 enterprises. But this time they excluded tribally owned ones. This makes it impossible to compare the two sets of data with any precision, but it also allows us to guess, with some degree of confidence, that Native entrepreneurs—individuals or families, not tribal entities—started more than 9,000 enterprises in those five years. We don’t know just how much growth there has been in Native-owned, independent businesses, but we know there’s been a lot. The independent business sector is booming.

There’s another problem with these data. They don’t say where these businesses are located. We know that in the past, most Indians who started businesses did so in urban areas, not on the reservations. But where is it happening now? The data don’t tell us.

I want to make four points about this second transformation. The first has to do with a shift in the location of growth in the independent business sector. Second, I want to tell you why I think this growth in independent business development is so important. Third, I’m going to talk about why growing this sector is so difficult. And fourth, I’m going to suggest some things that Indian nations can do to help make it happen.

My first point is that the location of entrepreneurial growth is changing. That sector may have been largely urban in the past, but I think it’s beginning to shift. I can’t support that with hard data; we simply don’t have good data on the growth of reservation-based, citizen entrepreneurs. But many of you have seen the burst in what I call “tribal-citizen entrepreneurship,”or businesses started and owned by tribal citizens—individuals and families—on Indian nations’ own lands. You know it’s happening out there because many of you are doing it, or you work with people who are doing it.

The second point is: why should we care? Why does this matter? I’ll offer ten reasons why this is important, not just for the individuals and families involved but for Indian nations. So, what does tribal-citizen entrepreneurship do?

It generates jobs. We sometimes think economic growth is all about the big guys—Microsoft or Exxon or Wal-Mart. But about half the jobs generated in the United States are in firms with fewer than 20 employees. Small business is a job generator.

It builds reservation wealth. Jobs are not the only benefits produced by citizen entrepreneurs. These people tend to be local residents who reinvest sizable portions of their profits at home, typically in the maintenance or expansion of their businesses. Not only do the wages they pay stay in the community, but much of their profit does as well.

It increases reservation multipliers. A lot of small businesses are retail operations serving local needs for everything from groceries to movie rentals. When these businesses appear, they provide opportunities for tribal citizens to spend dollars on the reservation. This means the dollars turn over at home, thickening economic activity and multiplying its effects.

It helps build a tax base. Reservation businesses use reservation infrastructure and governmental services, from roads and utilities to law enforcement and education. Why shouldn’t those businesses also support such things through modest value-added, sales, or gross-receipts taxes? Tribal governments should be doing their part to create an environment in which lots of tribal citizens want to start businesses and do so, because such businesses are a potential source of revenues that can be used to fund reservation infrastructure and government operations.

It diversifies the tribal economy. Many Indian nations today are heavily dependent on federal monies for reservation employment, leaving them hostage to budgets and policies they don’t control. Others are dependent on gaming operations, natural-resource extraction or some other single industry, leaving them vulnerable to devastating market shifts. Citizen entrepreneurship helps to create a more diversified and resilient tribal economy.

It sends important signals to citizens. As one entrepreneur told us in the course of our research, “small business activity has a tremendous psychological and emotional impact on reservation people, particularly reservation youth. When they see businesses sprouting up, they see hope for the future.” They also see models of productive, individual effort and alternative careers.

It retains talent. Citizens in a number of nations would like to start their own businesses, but many of them feel they have to leave home to do so. Instead of exporting talent to non-Indian communities, the nation should be encouraging such people to stay home. Creating a supportive environment for citizen entrepreneurs would help.

It improves the quality of life. Developing a homegrown retail sector can improve the quality of reservation life, saving families the long journey to off-reservation sources for food, other goods, and services. Citizen entrepreneurship increases the range of choices available to tribal citizens.

It broadens the development effort. The economic challenge facing Indian nations is enormous, particularly where the legacies of poverty are most severe. Many Indian citizens tend to look to tribal government to meet this challenge. But tribal government alone cannot do the job. By encouraging and supporting independent businesses, government invites more citizens to join the development effort.

It strengthens tribal sovereignty. Tribal-citizen entrepreneurship can help an Indian nation reduce its dependency on federal sources to fund government operations, employ people and deliver social services. This helps free the nation from one of its most costly burdens: its dependence on outside decisionmakers, program designers and funders who may or may not have the nation’s best interests at heart. In short, growth in citizen-owned businesses strengthens tribal sovereignty.

I think this is a pretty persuasive list of the benefits of citizen entrepreneurship, but it raises a question and brings me to my third point: If citizen entrepreneurship is so good, why don’t we have more of it?

Some of the answers are obvious. Starting a business is tough. It’s a challenging, demanding task in any setting, but it’s especially difficult in rural areas and, I would argue, even more difficult in Indian Country. You can divide the obstacles into two categories. Many Indian reservations are rural, and reservation entrepreneurs often encounter the same obstacles other rural entrepreneurs encounter, so the first category consists of obstacles shared with non-Indian entrepreneurs. These include limited or distant markets, limited financing, fewer opportunities for training and skills development and so forth.

But there’s another category as well: issues that are distinctive to much of Indian Country. These include some cultural issuesand the reservation governance environment.I won’t spend much time on the cultural issues, but we should at least mention them. Individual entrepreneurship does not always fit easily with indigenous cultures. Some tribal cultures are more tolerant than others of individual success. We also see some situations where tribal communities are concerned about commercializing certain tribal resources. In some cases, as a result of years of having transfer economies on reservations, we’ve also seen the growth of a culture of dependence that saps individual initiative and responsibility. And then there are the perceptions of some non-Indians who see the community commitments of Indian entrepreneurs as a problem. They don’t understand entrepreneurs who say, “I could make more money somewhere else, but I want to support my nation.” I think that attitude is an asset for Indian nations, but it sometimes mystifies outsiders.

But my focus today is the other set of obstacles: the reservation governance environment. This is critical. Most people going into business in the rest of the U.S. take the governance environment for granted. They assume that there will be an effective, independent court system to process disputes and a commercial code that lays out the rules for business operations. They assume that, for the most part, politics won’t be a big factor in their business operations; the regulatory regime will be both clear and, for the most part, sensible; and the local bureaucracy may be frustrating, but it will be manageable.

It’s tougher to assume these things in much of Indian Country. Some tribal courts answer to tribal councils and are either politicized or severely underfunded, or both. Many reservations have no commercial codes. If you want to start a business on a reservation, you may face no regulatory regime at all, or one that is mystifyingly complex, or one that is clear but not enforced. How the tribal bureaucracy deals with you may depend on who you voted for or who your relatives are. And so on.

These problems don’t exist everywhere in Indian Country, but they’re not unknown either. Where they exist, the results can be crippling to citizen entrepreneurs: an environment of instability and unpredictability, higher business costs, far too much time trying to negotiate the tribal bureaucracy and so forth. Far too often, this leads to exit—a brain drain as individuals with energy, talent and ideas decide to take their chances somewhere else.

Let’s look at some examples, both of how the governance environment can work against citizen entrepreneurs and of how it can support them. Here are three quick ones from our research files.

Nation One: This is a big nation with both major economic needs and major economic opportunities. It has high unemployment, but it also has a large population that needs goods and services, and it is full of would-be entrepreneurs. Yet there are few on-reservation businesses, and most dollars are spent off-reservation. One reason has to do with tribal governance. Most of the land is tribally held. If you want to start a business, you need to lease a site from the nation, but the site-leasing process has more than 100 steps and typically takes more than a year to complete. Meanwhile, in a nearby, off-reservation city, a new business can be up and running in less than 30 days.

What’s the result? A massive brain drain as young people with ideas and energy leave the reservation to start their businesses, and the tribal economy loses hundreds of potential jobs. In other words, the nation’s own government has set up a daunting obstacle course for those who want to go into business for themselves. And this is a nation that is desperate for economic growth.

Nation Two: This is a large nation with extreme unemployment and major social problems. It has multiple communities, all of which have needs for groceries and personal and business services. On the plus side, the reservation has significant tourism potential. It has a small group of determined entrepreneurs and a cultural history of honoring individual achievement. But it also has some problems. It has a politicized business-permitting system in which family and political connections play a significant role, a badly underfunded and thoroughly politicized tribal court that makes the quick resolution of business cases nearly impossible and a tribal council that has tried to make entrepreneurs pay high fees for the land leases that are necessary to get into business.

What’s the result? High business start-up costs, lots of political game-playing and a struggling entrepreneurial sector that could thrive under changed conditions. Is there hope? Well, there’s a small group of determined, talented, incredibly hard-nosed citizen entrepreneurs who, by sheer force of will, are making it despite the situation they face. They support each other, and they’re trying to promote constitutional reforms that could make things easier. More power to them.

Nation Three: This story is different. Until recently, this nation lacked an on-reservation retail sector that could serve its citizens. It had high dependence on its gaming enterprises for revenues and jobs. Luckily, those revenues were substantial, but the nation wanted to thicken its economy and reduce its dependence on gaming. So it took action. Today, it uses some of its gaming revenues to support citizen entrepreneurs. It does so by providing them with training, technical assistance and low-interest loans. But to get a loan, the business idea has to pass strict market tests. If you don’t pass, the nation will work with you to help craft a better plan. And it will keep tribal politics out of the loan-approval process and related business decisions.

What’s the result? Thirty new businesses in the program’s first four years, with a high business survival rate. This, in turn, has meant jobs and services for the nation’s people and a sense of pride for all its citizens.

These stories—and there are plenty of others out there—bring me to my fourth point: What can Indian nations do to increase tribal-citizen entrepreneurship? Let me suggest three areas where valuable change can happen.

The first is attitudinal changes. These include both the attitudes of the nation’s government toward citizen entrepreneurs and the attitudes of citizens toward entrepreneurship. It means getting tribal government to see entrepreneurs not as competitors taking money that the tribal government should be getting instead, but as fellow contributors to meeting the development challenge, and—to the extent that they are successful—perhaps as potential revenue producers, through modest permitting fees or taxation. It means that tribal citizens themselves, instead of assuming that economic development is the government’s job, see entrepreneurship as a way of rebuilding communities and families and participating in restoring the nation’s economy.

How might you make such changes happen? Make citizen entrepreneurship a conscious, deliberate part of the nation’s overall development strategy, alongside tribal enterprises. Honor those who succeed and contribute to the nation’s well-being. Encourage young people to imagine themselves as entrepreneurs helping to support their families and nation. Find ways to demonstrate tribal support for entrepreneurs. Henry Cagey, longtime chairman of the Lummi Nation in Washington State once drove all the way from the reservation to the state capitol to help one of his citizen entrepreneurs cut through the state’s red tape. His investment was mostly of time, but he accomplished two important things when he made that trip. He helped solve an immediate problem for someone who might make a significant contribution to his nation’s economy, and he sent a message to citizen entrepreneurs that the nation would stand behind them.

A second area where changes can happen is investments. Not every nation has the financial resources to do what Nation Three did. But there are other options, from infrastructural investments to loan funds to setting up a small business office that can assist local entrepreneurs. The nation might build a relationship with a local educational institution and persuade it to offer evening business classes on the reservation. The investment could be as simple as having the tribal newspaper regularly provide a list of helpful resources for would-be entrepreneurs.

But the most important area, I think, is the third one: institutionalchanges.These are changes in the organization of tribal government itself. The key question is this: Has the tribal government created an environment that encourages and facilitates entrepreneurship, or one that discourages it and gets in the way? Several things are critical.

First, a capable tribal bureaucracy.In most Indian nations, as in most places, starting a business involves various permitting, leasing or other bureaucratic processes. These processes can become bureaucratic or political sinkholes. In bureaucratic sinkholes, applications disappear for months because the system is not organized for prompt and efficient processing. In political sinkholes, friends and relatives of those in power get special treatment, while enemies get nowhere. Both types of sinkhole undermine the entrepreneurial environment and encourage business people to look for better opportunities—and better treatment—somewhere else. Key question: Does the tribal bureaucracy manage permitting and other business-related procedures as efficiently, effectively and fairly as nearby, non-Indian communities do? If the answer is “no,” then the nation is creating its own competitive disadvantage.

Second, a sensible regulatory environment.All Indian nations have regulatory concerns, from sacred site protection to environmental issues, from health and safety to the business location. The regulatory challenge is to find a middle ground between an environment that is so restrictive or difficult to work with that people choose to take their ideas, energy and money someplace else, and an environment that fails to protect or organize what needs protection or organization. Key questions: Does the tribal regulatory system protect what you wish to protect? Is it so complex and restrictive that it discourages would-be entrepreneurs?

Third, and related to that, a commercial code.A commercial code establishes how businesses get started, what they can expect from the tribe, what their own responsibilities and obligations are and what sorts of legal recourse they have in the case of disputes. While you may want to start with the standard Uniform Commercial Code, bear in mind that you may need to customize it to fit the situation, government and culture of the nation. It also has to be enforced fairly and equally for everyone.*Key questions: Do you have a commercial code? Is it fairly enforced?

And fourth, and probably most important, an independent tribal courtor a comparable mechanism for resolving disputes. An environment in which disputes are likely to be settled on political grounds will discourage tribal citizens from starting businesses. They have to believe that if they’re involved in a business dispute—a disagreement over the terms of a land lease, for example, or a dispute over payment for a completed contract—they will get a timely and fair shake from the tribal court. This means the court has to be seen as independent of other elected officials, such as the tribal council or president, and capable of protecting entrepreneurs from politically based retribution. A strong, independent tribal court or comparable mechanism sends a message to every would-be entrepreneur that, win or lose, you will be treated fairly and your claims will be judged on their merits. Without that message, only the very brave, the very determined or the very foolish will invest energy and money in the tribal community. Key question: Do you have in place a strong and independent court or similar mechanism for resolving disputes, one that persuades investors they will be treated fairly?

Any nation that seriously wants to support the citizen-entrepreneurship sector should consider action in these three areas—attitudes, investments and institutions—and particularly in the institutional arena. This is nation-building, and it is the key to economic success. If you try to make attitudinal changes, but the organization of government leaves entrepreneurs subject to politics, those entrepreneurs won’t stick around for long. If you invest lots of money in infrastructure and training, but entrepreneurs still can’t get permits processed quickly, or can’t find out what the rules are on environmental issues, or can’t get a fair shake in the tribal court or from the council, then your investments in infrastructure and training will just be money down the drain.

So, the questions to ask yourself are these: Do you want to include citizen entrepreneurship in your development strategy? Will the community benefit from and tolerate such entrepreneurship? Do you have a governmental structure in place that will support—not penalize—citizen entrepreneurs? If the answer to these questions is yes, you’re on your way.

Building nations (and a future)

I don’t mean to argue here that this is the best development strategy for everyone. For some nations, tribally owned enterprises may be all the development strategy they need or want. But for many others, citizen entrepreneurship can be one of the building blocks in a sustainable tribal economy.

But if you choose that route, then you have to keep a key point in mind: Citizen entrepreneurs cannot make the strategy work on their own. Much of the responsibility lies with tribal government. If we’re serious about increasing the amount of citizen entrepreneurship on Indian lands, then the challenge for Indian nations is to create a governance environment that invites tribal citizens of every sort to join the great economic transformation that is currently under way. The challenge, in other words, is nation-building.

Then, when people like the writer in The Wall Street Journalclaim that the time for tribal nations is past, we can tell them that the time for tribal nations is, in fact, just beginning, and that they have missed the big story in Indian Country today, the story of what people like you are doing: tribal nations and their citizen entrepreneurs, building a new future together.